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The financial landscape is currently undergoing a structural shift that challenges traditional assumptions about public markets, digital assets, and regulatory oversight. As capital increasingly flows into private equity and blockchain technology matures beyond speculative trading, the legal frameworks governing these sectors are struggling to keep pace.
In a recent conversation, Mark Elovitz, Global Head of Investment Management Regulation at McDermott Will & Emery, provided a detailed look at the intersection of law and modern finance. From the decline of the IPO to the bipartisan future of crypto custody, Elovitz offers a pragmatic view on how sophisticated investors and regulators are navigating this new reality.
Key Takeaways
- The IPO is no longer the gold standard: Burdensome bureaucracy and the efficiency of private markets are leading many companies to stay private longer, challenging the notion that public markets offer superior investor protection.
- Crypto regulation is shifting toward harmonization: After years of hesitation, US regulators (SEC and CFTC) are signaling a more cooperative, open approach to digital assets, particularly regarding custody solutions.
- Explainability is the antidote to AI risk: Financial firms cannot rely on "black box" AI models; mitigating hallucinations requires deep subject matter expertise to verify and explain the technology's output.
- Reputation drives private equity valuations: While critics worry about firms "marking their own homework," the need to raise future funds acts as a powerful market discipline against fraudulent valuations.
- Legal certainty trumps deregulation: Despite the trend of companies moving to states like Texas or Nevada, Delaware remains the preferred jurisdiction for corporations seeking predictable legal outcomes.
The Shift from Public to Private Markets
For decades, the Initial Public Offering (IPO) was the ultimate goal for growing companies. However, the prestige of going public is waning. Policymakers often argue that public markets are inherently safer for investors due to transparency, but the reality is more complex. The bureaucratic red tape associated with being public—such as conflict minerals disclosures and extensive reporting requirements—often creates friction without necessarily providing material value to investors.
Conversely, the private market is not as opaque as its name suggests. Institutional investors, including pension funds and endowments, have fiduciary obligations that drive intense due diligence. They do not invest in the dark. As Elovitz notes, the role of regulators like the SEC is not to judge the merit of an investment, but to ensure that the disclosure of material facts is accurate.
"There’s kind of an assumption that if a company is public, there’s going to be better, more investor protection... I’m not sure that this idea of having companies be public as an investor protection goal is the right answer."
Furthermore, the rise of Artificial Intelligence may render the traditional distinction between public and private disclosures less relevant. AI’s ability to process, condense, and analyze vast amounts of unstructured data means that investors in private markets can increasingly achieve levels of insight that rival public reporting.
The Evolution of Digital Asset Regulation
The regulatory environment for cryptocurrency and digital assets in the United States has historically been characterized by hesitation and turf wars between agencies. However, the landscape is shifting toward harmonization. Notably, leadership at the SEC and CFTC has begun to align, moving away from jurisdictional disputes toward a shared goal of "Project Crypto"—creating a workable framework for digital assets.
The Custody Puzzle
While headlines often focus on the price of Bitcoin or the approval of ETFs, the real regulatory battleground is custody. How do institutions safeguard digital bearer assets? In the physical world, security meant vaults and certificates. In the digital world, security requires advanced cryptography and technology.
Developing robust custody rules is not a partisan issue; it is a fundamental investor protection concern. Whether an administration is Democratic or Republican, the need for technology that protects assets better than a physical wallet is a shared priority. This bipartisan consensus suggests that custody regulations will likely survive political transitions, providing the stability institutional investors need to enter the market.
Tokenization and Yield
Beyond simple cryptocurrency trading, the broader application of blockchain technology—specifically tokenization—is gaining traction. The ability to settle transactions instantly, without the traditional lag times of the banking system, represents a significant efficiency upgrade. However, tension remains regarding stablecoins and the banking sector.
The core conflict lies in yield. Banks rely on deposits to generate interest; consequently, legislation that allows stablecoin issuers to offer yield on digital deposits faces stiff resistance from the traditional banking lobby. Until a compromise is reached regarding interest-bearing stablecoins, a full merger of traditional banking and digital assets will face hurdles.
Trust and Valuation in Private Equity
A common critique of the private equity industry involves the valuation of illiquid assets. Skeptics argue that because these assets are not marked to market daily, firms are essentially "marking their own homework," potentially inflating values to look good to investors.
While subjectivity is inherent in valuing complex assets like AI infrastructure or private companies, market forces provide a powerful check against malfeasance. Private equity is a repeat-game business. If a manager inflates valuations today, the truth will eventually emerge upon exit. Once trust is broken, the ability to raise the next fund evaporates.
"If you don't create and maintain that trust, investors are going to devalue you... It’s really very much counter to the interests of any private equity firm to rely on valuations that no one can trust."
AI in Finance: The Explainability Mandate
As AI integrates into financial workflows, firms face two primary risks: hallucinations (the AI inventing facts) and the "black box" problem (inability to explain how a conclusion was reached). Elovitz argues that the solution is not to avoid AI, but to demand explainability.
For example, asking a Large Language Model (LLM) to summarize SEC rules on "best execution" might yield a convincing but factually incorrect list of criteria. If a legal or compliance professional relies on that output without the expertise to verify it, the firm is exposed to regulatory risk. Therefore, the responsible use of AI requires human experts who can forensicially review the AI's logic. Firms cannot outsource their judgment to the algorithm; they must use the algorithm to enhance their judgment.
Corporate Governance and the Delaware Question
In the realm of corporate law, a fascinating trend has emerged: shareholder activism and the migration of incorporation. High-profile disputes, such as those involving Elon Musk, have sparked conversations about moving corporate domiciles from Delaware to states like Texas or Nevada.
While some executives express dissatisfaction with Delaware’s strict judicial oversight, the state offers something that emerging jurisdictions cannot: legal certainty. Delaware has centuries of case law and precedent that allow corporations to predict how disputes will be resolved. Moving to a jurisdiction with less developed corporate law introduces significant risk. For most large public companies, the value of predictability outweighs the allure of a potentially friendlier, but untested, legal environment.
Conclusion
The connective tissue between these diverse topics—from private equity valuations to AI implementation—is the necessity of human judgment and long-term perspective. Whether it is a regulator trying to future-proof crypto laws or an investor navigating a market crash, the immediate chaos often obscures the structural shifts happening beneath the surface.
Navigating these changes requires an open mind and a willingness to engage with complexity. For professionals entering this space, the advice is clear: do not be beholden to the traditional paths. The convergence of law, technology, and finance is creating opportunities that did not exist a decade ago, and the most successful market participants will be those who can adapt to these new regulatory and technological realities.
